Investors cautiously return to market

Spurred by recent interest-rate cuts by the Federal Reserve, continued low inflation, hefty consumer spending, and low unemployment, the stock market has resumed its upward roll.

The Dow Jones Industrial Average has added some 1400 points since its October lows around 7500. Many investors have recouped more than half their summer losses, when equities dived to levels usually associated with a bear market.

In September, stock funds took in a net $6.3 billion, according to the Investment Company Institute (ICI) in Washington. That followed a net sell-off of $11.7 billion in August.

But while money slowly ebbs back into stocks, ICI says the level remains far below the $19 billion a month of the first half of 1998.

But most importantly, investors are once again watching their funds post positive returns.

"The recovery is genuine," says Peggy Farley, who heads up the financial firm Ascent Asset Management, in New York. "Many of the problems abroad are being addressed," she says. "There has been a change in the global market."

In addition, stocks became more reasonable during the late summer downturn. Small-company stocks were beaten down. And many technology stocks, while still expensive by historical measures, are far cheaper than they were earlier this year.

"The market appears to have bottomed," says Al Goldman, chief investment strategist with financial house A.G. Edwards &amp; Sons, in St. Louis. He urges investors to look for undervalued, well-established companies. Within mutual funds, such firms are often found in value funds, or growth and income funds.

"The two rate cuts, especially the surprise second cut, really helped the market regain its momentum," Mr. Nie says. If the Fed fails to push through a third cut when policymakers meet Nov. 17, that "would weigh very heavily on this market," he adds.

The investment community is expecting a third cut, Nie says, but even if the Fed holds back, Nie sees no immediate threat to the rally, and certainly no full scale retreat back to the bears. (See story, right.)

Investors should worry only about a new bear market - what technicians call a "bear trap" - if the Dow dropped below 8400 points, he says.

With some economic data showing a slowing in the US economy - manufacturing activity tapered off, for example - "the Fed now has room to ease further," says Robert Barbera, chief economist for Hoenig &amp; Co., in Rye Brook, N.Y.

For the moment, investor confidence appears strong. That contrasts somewhat with consumer confidence, which is dropping.

"Our [investor] 'sentiment index' is now running at a higher level than usual," says John Markese, president of the American Association of Individual Investors (AAII), Chicago.

The index measures bearish and bullish attitudes among AAII members. The average sentiment index, since the market crash of 1987, has been around 35 percent. The index is now running at 42 percent, says Mr. Markese, which suggests investors see opportunity.

If you have pulled out of the market or reduced your holdings, this is time to ease back in, says Markese.

He recommends having no more than three or four domestic-stock mutual funds - such as a growth and income, a large-company (large cap) fund, or an index fund. Large caps may work better for conservative investors, he says, because they are less volatile than smaller cap stocks.

Still, small-cap stocks, including many technology firms, have been the star performers in recent weeks.

In an uncertain period such as this, where the market appears to be moving sideways on many days, be willing to follow successful sectors, says Ralph Acampora, chief market technician with investment house Prudential Securities Inc., here.

Most fund groups offer a wide variety of sector or specialty funds. But keep in mind that sector funds often impose special charges, either when entering, or exiting.